New Directions in Modern Economics series
Chapter 3: A Brief History of Innovation in the Consumer Credit Industry
In Chapter 2, the decline of the personal saving rate was explained as the manifestation of an eﬀort by a broad swath of households to maintain their relative consumption (or lifestyle) standards under pressure of sharply rising disparities of income and wealth. It was argued that an expansion of credit-ﬁnanced expenditure can limit the degree to which ‘consumption inequality’ rises in the aftermath of an increase in income or wealth inequality, but this necessarily requires, ceteris paribus, a decrease in the average propensity to save among borrowing units. We now turn to the role of innovation in achieving a long-run relaxation of the household liquidity constraint. This chapter oﬀers a description and appraisal of organizational, technical and ﬁnancial innovations deemed important to the growth of the consumer credit industry beginning in the 1920s. These innovations are: the ‘captive’ ﬁnance company; lengthening loan maturities; credit scoring; and the securitization of consumer loan receivables. The chapter also contains a section that examines the growth of payday lending, assetbased lending, and other types of lending arrangements targeted to households with low incomes and/or poor credit histories. 3.1 THE CAPTIVE FINANCE COMPANY The forward integration into previously non-integrated activities such as wholesale and retail distribution was a deﬁning feature of the post-bellum business revolution. Alfred Chandler (1988) explained the new pattern of downstream integration by the inadequacy of pre-existing systems of marketing and distribution to the requirements of modern mass production.1 The development of a wide-ranging dealer network was a...
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